R Y

T O
EN
N V
I
F 7
O
T KN O
.

I
D S
U
A JT T
A

O
OBJECTIVES

The principal objectives in auditing inventories are to determine whether:

 All inventories included on the balance sheet are held by the entity or by others for the
entity (Existence assertion);

 All inventories owned by the entity at the balance sheet date are included on the balance
sheet (Completeness assertion);

 Inventories are carried at the lower of cost and net realizable value (“NRV”) and that
the cost and NRV determinations are appropriate, including adequate provisions for
excess, slow-moving, obsolete and damaged goods, and for losses on purchase and sales
commitments (Valuation assertion);

 The entity owns, or has a legal right to, all the inventories on the balance sheet. All
inventories are free of liens, pledges or other security interests or, if not, such liens,
pledges or other security interests are identified (Rights and Obligations assertion);

 Inventories are properly classified, described and disclosed in the financial statements,
including notes, in accordance with the applicable financial reporting framework
(Presentation and Disclosure assertion).
PRIMARY SUBSTANTIVE PROCEDURES
APPLICABLE TO INVENTORY

PSP 1: OBSERVATION OF PHYSICAL INVENTORIES

Observe the taking of physical inventories. Verify that client count instructions are followed and that
inventories owned by others are separated. Perform appropriate test counts and trace test counts to the
inventory compilation.

PSP 2: CONFIRMATION OF INVENTORY HELD BY OTHERS

If significant, confirm inventories held by others at the physical inventory date and trace confirmed
quantities to the inventory compilation; consider observing these physical inventories as well.

PSP 3: RECONCILIATION OF INVENTORY COMPILATION WITH GENERAL LEDGER

Review the reconciliation of the valued physical inventory compilation with the general ledger account
balances and the perpetual inventory records. Investigate large and unusual reconciling items.

PSP 4: ROLLFORWARD PROCEDURES

If inventories are taken at an interim date, review the rollforward documentation in a manner responsive to
our combined risk assessment and investigate unusual items.
PRIMARY SUBSTANTIVE PROCEDURES
APPLICABLE TO INVENTORY

PSP 5: INVENTORY CUTOFF

Trace the cutoff information obtained during the physical observation to the accounting records of sales and
purchases.

PSP 6: VALUATION IN ACCORDANCE WITH ACCOUNTING POLICIES

Test the valuation of inventory to verify that it is performed in accordance with the client’s accounting
policies or applicable financial reporting framework.

PSP 7: NET REALIZABLE VALUE TESTING

Test the allowances to reduce the valuation of inventory to net realizable value, e.g., reserves for slow moving
items, obsolescence or lower of cost or market.